Netflix & WBD: why now and what next?

Netflix’s $83bn (£62bn) move for the streaming and studio assets of Warner Bros Discovery marks a turning point in the global industry.

The Ted Sarandos and Greg Peters-led company has, to date, grown into the biggest streamer in the world organically.

There have been only a handful of acquisitions to its name and there were some - but few - signs until recently that it would be shifting from that strategy.

Just two months ago, Netflix co-chief executive Greg Peters appeared to dampen speculation that the global streamer could buy WBD by pointing to his “scepticism around big media mergers”.

Talking at Bloomberg Screentime in LA in October, he highlighted that his company “comes from a deep heritage of being builders rather than buyers” and noted “a reasonable amount of scepticism around big media mergers” and their success.

So what changed and why now?

Before diving into the immediate answer, it may be instructive to rewind a little.

Over the past decade, the collapse of the cable bundle in the US – driven in part by the launch of Netflix – has created a shortfall in revenue for what were the titans on Hollywood.

Revenues were increasingly squeezed as households ditched expensive monthly cable bundles for cheaper streaming options, resulting in US studios seeking scale to survive. The global pandemic, a debilitating writer’s strike and ongoing travails for theatrical did not help either.

Warner Bros Discovery was the product of such a merger back in 2022 but almost all senior execs at US studios spoken to by Broadcast International this time last year were adamant that some serious consolidation was on the cards for this year.

Perhaps more surprising is why it took so long.

Part of that may be down to the US regulatory system: Skydance’s acquisition of Paramount took more than a year to formally wrap and when it did, chief exec David Ellison’s impatience to further expand his newly enlarged company was clear with his unsolicited move for WBD – not once, but three times.

In an investor call this morning, Peters and Sarandos were questioned as to why they didn’t make a move to acquire WBD four months ago, prior to Paramount Skydance’s approach.

At that point, the HBO owner’s share price stood at barely $11. (Netflix’s deal unveiled today will see the streamer paying $27.75 per share).

“It wasn’t for sale before and it hadn’t cleaned up or separated the assets as they have now,” Sarandos said, noting WBD’s ongoing process to split its legacy cable business from its streaming & studios division that are now poised to become part of the Netflix empire.

Peters also reiterated that the streamer has got to where it is today without major M&A moves, adding the company “didn’t think this asset was for sale in this way until right now”.

He also addressed the fairly sorry history of major US media M&A deals, not least AT&T’s $85.4bn acquisition of Time Warner in 2018, which ultimately led to the creation of WBD.

“It is true, many of the mergers haven’t worked out as planned but you have to look at them on a case-by-case basis. A lot of them, historically, involved a company doing an acquisition where they did not understand the entertainment business or the assets. We absolutely understand these assets.”

Peters said previous M&A deals from “legacy” companies looking for a “growth lifeline” were not a comparison to Netflix’s move for WBD. “It just doesn’t apply to us, because we are a live, growing business.”

The co-chief exec admitted that the streamer was not expert in doing large scale M&A but pointed to the company’s experience of shifting to market realities, be it moving from DVD’s to streaming, or from licensing to originals.

“There are lots of examples of us getting in and iterating over time.”

How will HBO Max fit into Netflix?

It has been a busy week for HBO Max, with launch dates unveiled in key European markets this week, but where does the streamer’s future lie in this new-look world?

Much remains up in the air with the deal, and while Netflix top brass did not provide specifics, the suggestion was that HBO Max will remain in some form a standalone offering, potentially available as another tier for subscribers.

“It is early to talk specifics on tailoring this offering for consumers but we think the HBO brand is certainly very powerful for consumers,” he said, adding that the brand “could constitute – and would constitute - part of our plans”.

“It gives us a lot of options in terms of how to package things to maximise value for consumers and the value of the assets.”

Peters said there was a “high overlap” in terms of subscribers to both HBO Max and Netflix, but the ambition is to use that to drive growth and retain customers.

“They are paying a nice discreet amount for the value of entertainment they are getting, and that is reflective of the value of the Warners library, which in turn gives us other levers in terms of packaging that offering”, he said.

Outside of the US, there seems also a belief that Netflix’s giant global footprint can help to monetise HBO Max titles.

“There are many Netflix subscribers who are not HBO Max subscribers and we think there is a real opportunity to bring some of those titles to subscribers in different tiers and plans to unlock the value of those assets.”

And, assuming the deal proceeds, Netflix’s offering will be vast: the DC universe and legacy titles ranging from The Sopranos and The Wire to The Big Bang Theory, House of the Dragon and The Last of Us will share a roof with a shows such as Wednesday, Money Heist, Bridgerton, Stranger Things, Adolescence and Extraction.  

Production predictions

Sarandos and Peters were quick to point to the “pretty limitless” opportunities that a combined Netflix-WBD could bring to IP spin-offs, highlighting shows such as The Penguin.

Peters also pointed to the importance of WBD’s development projects, an area in which the more nascent Netflix lags.

“We’re running as fast as we can,” he said, but admitted that the HBO development pool would be a “very valuable” asset. 

“Our deep development pool is quite shallow so we are moving pretty quickly on how we can [increase] development and this move will accelerate that.”

On the studios side, Sarandos confirmed that Warner Bros would continue to produce for third parties, adding that Netflix spend on content would continue as planned.

“We will continue to grow our content and entertainment offering,” he continued, adding that there would be “some synergies” in years to come but declining to outline where they may lie.

Theatrical releases remain in play, Sarandos added, before making the case that the acquisition would be good for the creative community as a whole.

“Netflix has been growing its production in the US with large investments in our new studios in New Jersey, in New Mexico and we’re the largest producer in California.

“This deal gives us the ability to invest in productions through HBO and Warner Bros and Warner Bros TV - it’s a good story because it is a healthy growing business helping another business to grow in a healthy way that will open up opportunities to creators.”

Job cuts and regulatory approval

While the deal looks set to transform the global content industry, it remains subject to US antitrust approval and greenlights from competition authorities around the world, including in Europe.

It is the US where the deal looks likely to find most opposition, with rival bidders Paramount Skydance widely seen to be closer to the Trump administration and potentially able to better shepherd the acquisition through regulatory approval.

Sarandos and Peters declined to discuss the process, but the former described the deal as a “pro-consumer, pro-innovation, pro-worker, pro-creator and pro-growth” acquisition.

“The plan here is to work with the appropriate government regulators and we are confident we can get the approvals we need. These are complimentary businesses,” he said, adding that he would not speculate on what comes next. “We’re full steam ahead.”

Job cuts seem inevitable and it is expected that around $2.5bn will be saved through efficiencies within three years of the deal closing.

That will mainly affect the “support areas” of the business, Peters said, with combined tech operations also contributing savings as the companies combine. “This will be a great marriage of two businesses coming together,” he added.

For consumers, that scenario seems to ring true but for those in the industry, the impact of this latest consolidation will be sized up in the weeks and months to come. It is certain, however, that another wave of change - arguably unprecedented in size - is now firmly in motion.